Momentum, leveraged trading keep software stocks on roller coaster

U.S. software stocks have experienced significant volatility recently, with the S&P 500 software and services index dropping over 33% from its October 28 record high to April 10 lows. The decline was fueled by concerns about the potential obsolescence of many software products following Anthropic's product release in January. After the stock index rebounded by 33% during the first quarter earnings season, it dropped again and partially recovered during the second quarter.

Software investors are particularly focused on quarterly reports from companies like Salesforce and CrowdStrike, as well as Oracle in mid-September. Momentum trading, buying shares that are rising and selling those that are falling, and the use of leveraged funds have amplified the swings in software sector stocks. These strategies, combined with AI-driven uncertainty, have created a roller coaster effect in the market.

Leveraged ETFs and single-day options have grown in popularity, offering up to double or triple the daily return or decline of popular and volatile stocks. These products have surged in number, from 28 at the end of 2023 to 486 for single-stock leveraged or inverse ETFs. The index is currently down more than 3% for the year and more than 12% below its October record. Despite some positive earnings results, investors remain cautious about the sector's future as AI technology continues to evolve.